Uncertainty over hope

Business Today | February 2009

Uncertainty Over Hope

Many believe US President Barack Obama’s inauguration marks a turning point in relations with the Middle East, but few are hopeful that Egypt can strengthen economic ties with the US as long as the economic crisis prevails

By Lindsey Parietti

United States President Barack Obama will spend his first full month in office crafting a federal budget, tightening financial regulations, pushing to pass a stimulus package and trying to save banks, among other responsibilities that come with inheriting a financial crisis. While it is unclear whether he will live up to what could be the highest expectations set for any modern-day president, one thing is certain, he will have little time to spare to think of trade relations with Egypt.

But that doesn’t mean that local experts aren’t thinking about a day when the US, Europe and Asia have begun to reign in the financial crisis and turn to developing countries like Egypt as they look to expand business with some of the few stable markets that are still growing.

Egypt has never been a major trading partner for the US, and after a Free Trade Agreement between the two failed to get off the ground during the previous two administrations, the question now is whether Obama’s team will be open to new negotiations or whether Egypt should focus its efforts more narrowly. With the economic crisis drying up foreign investment and the country’s recent role in the ceasefire negotiations in Gaza and refusal to open the Rafah border crossing, Egypt is reluctant to provoke Arab countries further by expanding a 2004 US-Egyptian-Israeli trade agreement. Experts differ on how Egypt should seek to develop trade and investment with the US, but agree that little will change between the two countries until the economic crisis abates.
Terms of Trade in a Time of Crisis

Despite concern over Obama’s campaign trail promises to impose environmental and labor standards on trading partners, many in the region are optimistic that his inauguration marks a turning point for both economic and political relations and that under his leadership, the US will begin to pull itself out of the crisis.

Dr. Magda Shahin, director of the Trade-Related Assistance Center within the American Chamber of Commerce (AmCham) in Egypt, believes the States’ weakened financial position will make Egypt and other developing markets an even more critical destination for American goods, lessening the leverage that the US may have to impose new trade terms here or elsewhere.

“Maybe they would have pushed very hard for these two issues [labor and environment] at normal times, harder than what we perceive they will be doing when there is an economic crisis, because they can not try now to take more protectionist policies and measures for their own markets when they need the external markets to get out of the crisis,” she says.

And although the playing field may appear to be leveling, if only slightly, in Egypt’s favor, Shahin says it is important that both sides try to find a balance between their needs.

Taher Helmy, former president of AmCham and a law partner at Baker & McKenzie’s Cairo office cautions that trade and investment are unlikely to improve, at least for the next 12 months, as the US looks inward and focuses all its resources and attention on administering bailouts and stimulus spending and drafting new financial regulations.

“So long as this uncertainty exists within the US market, it is going to be very difficult to turn the declining trade into a positive cycle again,” he says. “It has nothing to do with our economic or political relations with the country. I believe our relations will improve under the Obama administration.”

Helmy, who served on the Presidents’ Council, formed in 1995 under then-President Bill Clinton to enhance business ties between Egypt and the US, says that under normal circumstances, economic ties would likely improve under Obama, and that even during the current crisis, the stage is set for increased dialogue and improved political relations.

“I believe the appointment of Hillary Clinton as secretary of state is good because she is a known entity to us and I believe she will be more inclined to listen to Egypt and develop a relationship with Egypt and I think that’s why Egypt will have an advantage in the coming period,” he says. “[] Frankly, we were not listened to during the Bush administration.”

Obama’s early decisions to close the detention center at Guantánamo Bay and his pledge to pull out of the war in Iraq are already paving a political common ground that will lead to a more positive environment for increased trade and investment when the US economy recovers, says Helmy.

Wael Amin, president of Cairo-based ITWorx, which partners with companies including Microsoft to provide software solutions to companies in the US, Europe and the Middle East, believes the goodwill that Obama brings will have a tangible impact.

“As the perception of the US improves globally and the perception of the Arab world improves, this facilitates the creation of trust and bonds between private sector organizations and that generally improves trade,” he says.

But others are not so optimistic. Monal Abdel-Baki, an economics professor at the American University in Cairo, believes the Obama administration will bring little change when it comes to relations with Egypt.

“I don’t think that the US economic policies are going to be affected by just an individual changing [] you’ll notice that, the economic ties I’m talking about, not the political ties, are weakening,” she says. “So you’ll see this is a long-term relationship that has absolutely nothing to do with one individual or one party or one ideology.”
Free Trade and QIZ

Following Egypt’s economic reforms and the signing of a Qualified Industrial Zones (QIZ) agreement with Israel and the US in 2004, a Free Trade Agreement with the US seemed to be the next logical step. But preliminary negotiations in 2005 failed to materialize after the US expressed concerns about the progress of democratic reforms, and few are holding out hope that a bilateral agreement will be a priority for the new administration. With Egypt’s exports to the US declining and the European Union having replaced the US as Egypt’s primary trading partner, some question whether a Free Trade Agreement is even necessary.

“I believe that this administration is not a big believer in regional free trade areas [] This is why I believe that the US and Egypt will have a vested interest to look sector by sector how to work it out,” Shahin says.

Shahin suggests that Egypt should focus on expanding the QIZ opened in 2005, which allow Egyptian companies duty-free and quota-free exports to the US, provided that 35% of the product’s value is produced in one of Egypt’s 15 designated zones and that 10.5% of input comes from Israel. Egypt and Israel have a joint request pending to expand the zones to include some in Upper Egypt, which would produce dried onion and garlic, among other potential products.

In 1996, then-President Clinton started the QIZ protocol with Jordan, giving the country’s economy a much-needed boost. Egypt signed on in 2004, hoping that the removal of import tariffs would help the textile industry keep up with Asian competitors. Since 2005, QIZ here have grown from 397 companies to more than 700 companies, according to the Ministry of Trade and Industry. Before the agreement, Egyptian textile and clothing exports to the US were about $560 million (LE 3.1 billion) in 2004 out of nearly $1.3 billion (LE 7 billion) total exports to the US. In 2007, QIZ textiles accounted for $688 million (LE 3.8 billion) of the $2.4 billion (LE 13.2 billion) total exports to the US.

The Generalized System of Preferences (GSP) agreement also allows certain products from developing countries, including steel and textiles, to enter the US market duty free, but Egyptian exports under the GSP only accounted for $61 million in 2007.

“I think despite the fact that there will be no umbrella [free trade] negotiations having everything underneath, every country is going to eye the tradeoffs, so we would like certainly to use better the GSP, we would like to expand on QIZ, we would like to expand our exports,” Shahin says. “The US would like to see more forceful implementation of IPRs [intellectual property rights], the US would like to see an updating of the investment agreement to give additional rights [] there are lots of points which we have rejected so far because we don’t see where are the tradeoffs.”

But expanding QIZ or setting up similar zones for other sectors will likely remain on the backburner for a while. In addition to the far more pressing economic crisis taking the attention and resources of the US, Egypt’s recent role in Gaza and the subsequent backlash from Arab countries displeased with Egypt’s perceived pro-Israel stance would only further complicate the prospect of expanding trade agreements involving Israel.

“He [Obama] has to fix things at home first,” says Abdel-Baki, adding that the US could improve trade by allowing Egyptian companies freer access to American markets with less conditions attached.

And while Abdel-Baki agrees that even if FTA talks reopen, it is not likely to happen within the next couple of years. She says that the QIZ agreement is not a good alternative.

“You don’t need [bilateral trade agreements] [] You can simply just relax many of the very strict and stringent requirements,” she says referring to QIZ, which she believes has fallen short of expectations. “Just provide Egyptian producers with the quality standards that they need to meet and that’s it. You don’t need to complicate things there because Egypt is not that much of an exporter, it exports very little [in terms of total US imports] and for this reason, you don’t need a bilateral agreement.”

Whichever policies the Obama administration and Egypt decide to pursue, Khaled Eid, US regional official with the Oriental Weavers Carpet Company (ORWE.CA, bt100 number 13) says he doesn’t believe trade will change under the new administration.

“In the past year, there has been an increase in [our exports] with an estimate of 4-8%, which is great. We hope that we achieve this same percentage this year, but we don’t actually expect that this will happen because of the major global economic crisis.”

After petroleum, apparel and textiles followed by chemical and mineral fertilizers are the nation’s primary exports to the US, with t-shirts, singlets, and other vests making up 21% of exports to the US in 2007.

“The development of our exports to the United States will depend on the effort of [our business people], not on Obama or any other president,” Eid says.
A Stable Partner

While Egypt is a relatively minor trading partner for the US with just over $2 billion (LE 11.1 billion) in annual exports and $5.6 billion (LE 31 billion) in imports, keeping Egypt’s economy healthy is critical for the US in maintaining a politically and economically stable ally in the turbulent region.

“From the US perspective, Egypt is an emerging and lucrative market for US goods and services as well as a hub for operating in the Middle East and Africa. [] Furthermore, the economic fate of Egypt will indeed impact its political leverage in the region, leverage that the US will always rely upon. Increased bilateral trade relations and encouraging foreign direct investment can therefore provide a sound platform for enhancing the security relationship,” Shahin wrote in a recent op-ed piece in Al-Ahram Weekly.

Although opinions differ on whether or how the economic ties between Egypt and the US may change over the next four years, most agree that the US needs to strengthen the alliance and help Egypt to maintain its influence in the region as much as Egypt needs US markets, investment and aid.

“It makes a lot of sense for both countries to connect and to continue a very strong dialogue so they can take this region out of its problems and again, Egypt has proven to be a stable country,” Helmy says. “From an international perspective Egypt is the voice of wisdom in the region and again the current crisis [in Gaza] reconfirms that.”

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